Michael Saylor’s relentless pursuit of Bitcoin has made MicroStrategy Inc. a darling among retail investors and hedge funds alike. The company’s shares have surged over 500% this year, fueling a multibillion-dollar appetite for the cryptocurrency.
Calamos Advisors LLC co-Chief Investment Officer Eli Pars has been buying up $6 billion worth of convertible notes sold by MicroStrategy to finance its growing Bitcoin holdings. These low-interest, long-term notes can be exchanged for equity if the stock price rises above certain levels, making them an attractive option for hedge funds looking to deploy their own version of a convertible arbitrage tactic.
The strategy has been hot on Wall Street this year, with top holders of MicroStrategy’s bonds including Linden Advisors, Context Capital, Graham Capital, and Millennium Management. However, experts warn that the trade is not without risks, particularly if Bitcoin’s massive year-long rally reverses.
“Convertibles are a way for issuers to monetize the volatility of their stocks,” said Pars. “MicroStrategy is an extreme example.” But David Trainer, CEO of market research firm New Constructs LLC, cautions that this strategy relies on a game of “musical chairs,” where investors play until the music stops and hope they can get out before the crash.
As MicroStrategy continues to raise money through bond offerings, its credit profile remains tied to one of the riskiest asset classes. If Bitcoin’s price corrects and the premium of MicroStrategy’s Bitcoin holdings compresses, it could start to affect the firm’s credit rating. Nevertheless, as long as volatility remains high and Bitcoin trades in a reasonable price range, the arbitrage opportunity may prove too alluring to resist.
Source: https://finance.yahoo.com/news/hedge-funds-making-microstrategy-wall-000000560.html